A new University of Southern California Marshall School of Business study is the first to show why foreign companies have succeeded or failed while entering markets in China and India. Many of those findings are surprising, say its authors.

The study carried out by Gerard J. Tellis, professor of marketing at Marshall, and Joseph Johnson, a Marshall alumnus and assistant professor of marketing at the University of Miami, used longitudinal data to look at 192 different companies that had entered China and India as the markets started to deregulate.

The study found that contrary to previous research, companies do better when they are smaller in size, enter less open markets, and retain control as a wholly owned subsidiary rather than giving control to a local entity by licensing or in a joint venture. In addition, the study found that earlier entry and entry into China were more successful than late entry and entry into India, respectively. The study is published in the June 2008 issue of the Journal of Marketing.

"A lot of companies entered as joint ventures because they thought that local firms would help them gain a foothold in the market. However, in a joint venture local firms pull in many different directions or they tie down the entrant so it cannot follow its own direction," said Gerard J. Tellis, who is also director of the center for Global Innovation, and Neely Chair of American Enterprise at USC. "For example, Proctor & Gamble failed in India when it went in as a joint venture but succeeded in China as a wholly-owned subsidiary."

Setting up shop in China and India has become critical to the survival and success of many firms, especially as forecasters predict that China will be the leading economy of the world by 2050, with the U.S. and India following behind. "China and India are the fastest growing, most popular markets for foreign entrants in the world," said Tellis. "Our study helps market entrants know what to do to best succeed."

In that vein, Tellis says, small size should not deter new entrants. In India, large auto makers like GM, the largest auto maker in sales, and Toyota, the largest in market capital, have struggled, while smaller rivals like Hyundai have been quite successful.

Tellis and Johnson's study also found that as China and India liberalized and deregulated, opening their markets and creating easier entry, it became harder for companies to succeed as competition increased. The study showed that Pepsi, which entered India closer to its liberalization in 1991 enjoyed greater success over Coca Cola which delayed its entry into India.

"Firms should not only consider the growth of emerging markets but also the success rates of prior entrants," says Tellis, noting that a surprising finding was that entrants were less successful in India than in China. "We think it's probably because of the immense diversity of India, greater native competition, and inferior infrastructure relative to China."

The study which compiled objective data from hundreds of newspaper and magazine articles among other sources also showed that success is higher with companies that came from countries with a similar culture and economic climate, or those who bridged the cultural and economic gap, rather than jumping into distant markets. For example, the South East Asian agri-business conglomerate from Thailand, Charoen Pokphand Group, is more successful in neighboring China than the agri-based firm of Seagram that came from distant North America. Part of the reason is the challenge of understanding tastes in the foreign market: Kellogg's initially failed to market cold breakfast cereal in India because of the strong Indian taste for hot breakfast foods.

"There are always firms entering these markets and you don't jump into it without knowing what factors help and what factors hurt. Companies have to be more careful," says Tellis.

About the USC Marshall School of BusinessConsistently ranked among the nation's premier schools, USC Marshall is internationally recognized for its emphasis on entrepreneurship and innovation, social responsibility and path-breaking research. Located in the heart of Los Angeles, one of the world's leading business centers and the U.S. gateway to the Pacific Rim, Marshall offers its 5,700-plus undergraduate and graduate students a unique world view and impressive global experiential opportunities. With an alumni community spanning 123 countries, USC Marshall students join a worldwide community of thought leaders who are redefining the way business works.